The Economist: Immigration reform

March 2, 2013 at midnightUpdated March 1, 2013 at 9:02 p.m.

By Ray PerrymanOnce again, immigration reform is making headlines, with various proposals on the table for meaningful change to the current process. Immigration is a politically charged topic, and strenuous debate continues over policies and implications, particularly with regard to the illegal population. While some emphasize the value of a readily available workforce, others focus on costs, including health care, education and social services. Given the emotional nature of the immigration debate, the statistics emphasized and the conclusions drawn vary widely.

Although there are numerous considerations surrounding this issue, it is clear that immigrants, both legal and illegal, influence business activity in fundamental ways, and certain industries are highly dependent on the immigrant segment of the workforce. Although the characteristics and importance of documented immigrants can be measured in a relatively straightforward manner, the impact of illegal immigrants is more difficult to determine.

In 2008, my firm studied the issue of immigration, considering factors such as the likely numbers of illegal workers by state and by industry, dynamic adjustments that would be set in motion by a major change in immigration policy, spillover effects as various supply chains and payrolls are affected and relative differentials in skill levels and compensation associated with illegal workers.

We looked at the magnitude of the impact of the illegal workforce as well as the economic dependency of various areas and sectors on this source of labor. In order to provide some framework for consideration of immigration policy, we looked at what would happen if the illegal workforce were removed, both the initial "snapshot" (or static) effects and a dynamic view of the emerging patterns over time. Since our study, the immigrant population has continued to grow, though the illegal segment has (at least temporarily) leveled off and even declined slightly since its 2007 peak.

At the time of the study, we estimated that there were approximately 8.1 million illegal workers in the U.S. economy. If these workers were removed from the workforce, the effects would ripple through many industries, and the ultimate job losses would be even higher. Illegal immigrants comprise a large component of the workforce in some industries and geographic areas. We found that in 10 states, the percentage of illegal workers as a share of the workforce was greater than 5 percent, with Arizona the highest (with 12 percent).

For the U.S. as a whole, the immediate negative effect of eliminating the illegal workforce would include more than $650 billion in annual lost output (gross product). Even after the economy had time to make market adjustments (which could only fully occur if some provisions for additional entry were available), the foregone economic activity would include almost $245 billion in output each year and 2.8 million jobs.

Of course, a complete removal of the illegal immigrant workforce is neither possible nor under serious consideration, but quantifying the negative effect of taking these workers out of the economy illustrates their value. Overly restrictive immigration policy has the potential to devastate certain industries, which would be faced with near crisis conditions in terms of affordable labor.

To fill the gaps, Americans would have to be induced into the labor pool or provided incentives to take jobs far below their current education and skill levels. For this phenomenon to occur to a meaningful extent, substantial wage escalation would likely be necessary, thus eroding competitiveness in global markets.

Even during the worst of the recent downturn, there were stories of labor needs unmet (in the agriculture industry, for example) despite concerted efforts to entice workers. Some parts of the country are still experiencing overly high unemployment rates, but there is a poor match between many of the unemployed and the low-skill jobs often filled by illegal immigrants.

As the domestic workforce becomes older, more stable in number and better educated, the U.S. production complex increasingly requires foreign, low-skilled workers. In 1960, about 50 percent of men in this country joined the low-skilled labor force without completing high school; the number is now less than 10 percent. Shortages in the low-skilled labor force are likely to continue to escalate.

There is a legitimate policy debate regarding the proper path to legal status for illegal immigrants. There are also questions of how to pay for necessary services such as education, health care and so on.

However, it is crucial to recognize the basic and inescapable reality that overly restricting immigration will restrict the supply of workers who fill an absolutely vital role in the U.S. economy. We would be well served if we were to make this necessary part of the labor market function in a more efficient and effective manner through meaningful reforms.

Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.